20VC · 2025-11-20 · 83 min

20VC: Cursor Raises $2.3BN: Who Wins the Coding War | Peter Thiel and Softbank Sell NVIDIA: Analysed | Why Venture Capital Will Hit $1TRN and the Opening of Retail | Why Stripe and the Best Companies Will Never Go Public

Harry Stebbings

Podcast ↗

TL;DR

Cursor’s $2.3 billion raise at a $29.3 billion valuation is defensible if coding spend becomes a vast labor-replacement market. Tom Tunguz called agentic coding the strongest product-market fit after search, while Jason framed the bull case around a company moving from 1 to 100 and then to $1 billion in revenue, making $3–4 billion next year conceivable. Jason’s governing rule: “If you're not seeing massive TAM expansion, there's just no point in even playing as VCs.”
Cursor could retain 40–60% of coding-agent share if performance gains flatten before customer habits do. Tom Blomfield put Cursor at 40–60% share, while Tom Tunguz argued developers switch when models improve dramatically but stay once memory, personalized tooling and Fortune 500 standardization create inertia; he guessed Cursor might retain 75% of today’s audience five years out. Jason’s counter is that Replit V3 feels “Pluto and Mercury” ahead of predecessors and that software is improving two orders of magnitude faster than in prior eras, leaving the market’s “fat” far from congealed.
Gross margin looks improvable, but portability and price wars are the existential risks. At Tomasz’s venture firm, a 20 billion-parameter model reached 97% equivalency to Claude Code’s tool-calling capability, while Microsoft reported 90% more tokens per GPU-hour than 12 months earlier; Rory argued 60% gross margin on $1 billion of revenue with 100 employees would already produce substantial cash. The frightening case is that transferable prompts turn $100,000 agents into commodities: “If GPUs became more like DRAM, it would not be pretty out there.”
Late-stage venture currently resembles a private stock market with liquidity only when prices rise. Ramp reportedly completed four financings while moving from $13 billion to $32 billion, and 15% of Q1’s newly minted unicorns had already marked up again by Q3. Rory’s formulation was categorical: “The late-stage business is either the best business in the world or the worst business in the world,” because investors can trade step-ups but cannot count on exits during a reversal.
Thiel and SoftBank selling NVIDIA were weak top signals; the credit complex supplied sharper evidence. Thiel’s reported $100 million sale was below 1% of an estimated $10–20 billion net worth, while SoftBank was rotating into riskier OpenAI exposure, but Oracle’s credit-default-swap pricing rose to roughly three times peers as its AI commitments were repriced. NVIDIA also has extraordinary concentration—two customers above 40% of revenue and, as stated in the transcript, 4% representing above 50%—so any inference-demand wobble could make the correction “fast and brutal.”
US venture could reach $500 billion by 2030, but the outcome is becoming one correlated bet on a few companies. Tomasz Tunguz put annual deployment near $270–275 billion versus $8 billion in 2008; Rory cited Excel’s GlobalScape at $184 billion this year, with roughly half directed into four companies. If OpenAI, Anthropic, xAI, SpaceX and the other concentrated winners trade upward, their returns can swamp dozens of failed unicorns; if they do not, retail capital may discover the loss only after a five-to-seven-year feedback lag.
Stripe and the most coveted private companies may avoid IPOs because private capital now carries an “access premium.” A private round might cost about $1 million versus $25–30 million for an IPO, avoids quarterly-market burdens and now supports recurring employee liquidity; venture secondaries have consequently risen from 2–3% to roughly 10–12% of venture dollars. Tomasz sees investors “dollar cost” their way out across successive rounds, although Rory warned that a genuinely down market will test a system whose public-market behavior lacks public-market liquidity.

Digest · the substance, structured for research

1. Cursor’s valuation asks whether growth can overwhelm two real risks

Harry opened with Cursor’s $2.3 billion financing at a $29.3 billion valuation, naming Andreessen Horowitz, Thrive, Coatue, DST and Accel among the participants. Tom Tunguz’s bull case combined exceptional agentic-coding product-market fit, 30–70% developer productivity gains, rapid revenue growth and a new Cursor model running four or five times faster by tokens per second.
The financial profile looked unusually clean for AI. Tom cited total employee count at around 30, limited ESOP dilution and little of the capital-expenditure dilution borne by foundation-model companies. Rory later used 100 employees as a hypothetical for a $1 billion-revenue business, not as Cursor’s current headcount. Tom could “see a 3X,” although whether Cursor can raise prices remained an ultimate test.
Jason’s valuation bridge used an illustrative case: if something moved from 1 to 100 a year ago and from 100 to $1 billion this year, Newtonian momentum could take it to $3–4 billion next year, turning today’s headline valuation into roughly 10 times next-twelve-month revenue rather than an obviously absurd price.
The unresolved operating evidence was retention: Tom said vibe-coding companies can show gross account retention around 50%. In the quickfire, Tomasz and Jason still chose Cursor at $29 billion over Cognition at $12 billion; Jason said Cursor’s numbers were simply “jaw-dropping.”

2. Coding spend expands from a software seat into a labor budget

Jason rejected “30 to 70% productivity boost” as an increasingly backward framing because AI coding is becoming mandatory infrastructure. He expects nearly 100% developer penetration and ultimately $5,000–6,000 of annual spend per developer, regardless of which vendor captures it.
Tom said market-sizing models five years ago assumed 25–30 million developers, whereas a recent Microsoft earnings transcript discussed 100–150 million developers on GitHub alone. Jason’s aggressive arithmetic—100–200 million people eventually spending $400–500 monthly—put the category somewhere between hundreds of billions and “coming up on a trillion.”
Willingness to pay already exceeds published tiers. Tom exhausts a $200-per-month Claude Code Max allowance two days into the week and contemplated buying several seats to reach $1,000 monthly: “I will never go back to using a computer without Claude Code.” Jason said his Replit bill was higher still.
The market extends beyond professional programmers. Jason, who said he builds products but does not code, shipped 12 Replit applications since June that were used 700,000 times. Replit, Lovable and Base44 therefore address another population beyond the estimated professional-developer base.

3. Agentic pricing supports TAM expansion far beyond coding

Tom contrasted traditional $20,000–50,000 mid-market software deals with an agentic-software sales leader whose mid-market contracts were all high six figures to low seven figures. The mechanism was straightforward: these products replace some form of labor, so software pricing escapes the historical per-seat budget.
Jason said even 2% of GDP sounded low in a world where fewer people want “hands-on-keyboard” work. Rory rejected the trillion-dollar extreme but agreed that several million serious US developers spending $5,000 annually can still support an enormous company.
The episode’s underwriting distinction followed: “Entry price counts when TAM is unclear. Winning is the only thing that counts when TAM is huge.” That is why the panel accepted Cursor’s price while preferring Legora at $2 billion to Harvey at $8 billion, where Jason could not yet see the required $30 billion category exit.

4. Margin improvement need not recreate old SaaS economics

Cursor’s awkward structure is that its direct competitors also supply the tokens responsible for perhaps 50–70% of its product. With little labor expense, profitability and competitive durability collapse into one platform-risk question: can Cursor reduce dependence on the model vendors whose coding products challenge it?
Jason contrasted Cursor with Replit and Lovable, which can default users to inexpensive or “N-minus-one” models and already produce gross margins north of 50%. His unanswered question was how a frontier-model-heavy product reaches 60%, even after blending in its own model.
Tomasz offered an efficiency specimen from his venture firm: it used Claude Code to teach a 20 billion-parameter model how to call tools and achieved 97% equivalency to the much larger system. “There is so much efficiency to squeeze out of these model architectures,” even if nobody returns to the prior software norm of 70–72% gross margin.
Rory argued old SaaS margins also funded large sales forces and complex integrations. A self-serve product with $1 billion of revenue, 100 employees and 60% gross margin would still generate substantial cash; Microsoft’s reported 90% increase in tokens produced per GPU-hour over 12 months strengthens that path.

5. The coding market may congeal before technical progress stops

Tom’s switching model is performance-sensitive: developers move when Gemini 3 or another release materially outperforms “Claude 405 Sonnet,” but stay once gains asymptote. His Claude Code installation contains 100 self-written tools, coding memories and linting preferences, making migration worthwhile only for a significant improvement.
Enterprise purchasing adds another layer of inertia. Fortune 500 companies will choose one vendor, standardize and buy something resembling an enterprise license agreement; Tom therefore estimated Cursor could retain roughly 75% of its current audience five years from now.
Tom Blomfield’s five-year ranking put Cursor first at 40–60%, Microsoft second if it improves and bundles through VS Code, and Anthropic third because of its coding strength—roughly a 60/20/20 shape. Rory saw first-mover advantage for Cursor, enterprise distribution for Microsoft and model-level strength for Anthropic.
Jason resisted premature consolidation. Replit V3 was not merely “night and day” better but “Pluto and Mercury”: agents summon architects, bug hunters and reviewers, while an apparently unlimited context window remembers months of work. Fully agentic functional QA could create another 10X productivity jump.

6. The dispute is about when the “bacon in the skillet” hardens

Rory’s base case was the familiar three-to-four-year land grab followed by a decade or more of stable shares, even while the market multiplies. Intel’s performance doubled repeatedly without dislodging its market position; similarly, customers may let their chosen AI coder improve rather than continually migrate.
Jason countered that software historically achieved a major release or integration every five years, whereas today’s products are improving roughly two orders of magnitude faster than software did in prior eras. Cursor itself shows what 30 people can build, so another small team could still disrupt the apparent leaders.
Tom Loverro named the disagreement “the bacon in the skillet debate”: everything is hot, fluid and sizzling until the heat falls and the fat congeals. Jason believes the skillet stays “on 10” much longer; Rory thinks enterprise adoption can solidify shares even while the underlying technology continues advancing.

7. Portability is the wedge that could start an agent price war

Jason transferred a prompt trained for months in one AI agent into Salesforce Agentforce, iterated for about a day and obtained comparable performance. His lesson was not that moats are absent, but that transferable prompts and history make them lower than conventional SaaS switching costs suggest.
Rory separated benign Bureau of Labor Statistics-style deflation—twice the tokens for the same spending—from actual price erosion. The dangerous version begins when players three through five underprice to win share and leaders respond, creating a price war that SaaS largely avoided.
Current GTM-agent economics leave ample room to cut. Jason said implementations generally start around $100,000: perhaps $50,000–70,000 for software plus roughly $25,000 of forward-deployed-engineer support. In calmer budget conditions, moving a portable workload from a $100,000–200,000 agent to a $20,000 alternative could become compelling.
Tom Loverro did not predict broad collapse, but thought one or two categories might experience it first. Rory nominated core API pricing, coding agents and Lovable-like products; all expose relatively standardized digital inputs and therefore less friction than deeply integrated enterprise systems.

8. Integration depth separates sticky software from commodity DRAM

Rory placed Salesforce and DRAM at opposite extremes. Salesforce survives cheaper alternatives because ripping out its integrations is painful; commodity memory can swing 5X and then fall 50–80%, with buyers loyal to Samsung only until Hynix or another supplier becomes cheaper.
His historical SaaS evidence was that integration count best predicted retention. An interchangeable prompt sitting in a vendor-neutral database effectively says, “Cut me now when you have to save 80 grand,” whereas five operational integrations force enough IT work to preserve the incumbent.
Tom Loverro invoked Iceberg within the data ecosystem: enterprises reclaimed control of data previously bundled with Snowflake compute and storage. A similar abstraction could let companies own prompts and selectively feed them into competing agents, shifting value away from application vendors.
Jason already sees the migration. His organization runs roughly 12 AI agents and separately has five SDR/BDR agents running through different instances and vendors; employees increasingly talk to Agentforce, Qualified or Artisan rather than Salesforce itself. Incumbents may retain their logos while “the value’s just slowly leaking out every week.”

9. Late-stage venture trades beautifully only while marks rise

Rory found roughly 20–24 newly minted unicorns in Q1; by Q3, 15% had already raised at a higher valuation, with some completing two step-ups. Ramp reportedly financed four times during the year while moving from $13 billion to $32 billion.
That velocity made Harry question seed-stage craftsmanship when his platform could instead place $10–25 million into established high-flyers. Bessemer’s Anthropic and Ramp investments, alongside participation from Kleiner, Lightspeed and other historically early-stage firms, suggested these were being underwritten as risk-adjusted opportunities rather than crossover speculation.
Rory’s warning was structural: late-stage venture is “either the best business in the world or the worst business in the world.” A $100 million position can become $200 million without operational effort on the way up; in a reversal, private-market liquidity disappears precisely when a trader most needs it.
Harry described one investor as a ruthless book manager who bought at 60 and sold at 180 in the same year. Rory accepted the “new public market” analogy with one decisive qualification: private holders can trade upward step-ups, but cannot assume commensurate downside liquidity.

10. Credit markets carry sharper warnings than NVIDIA sellers

Peter Thiel’s reported $100 million NVIDIA sale was below 1% of an estimated $10–20 billion net worth. It registered as a minor negative—people rarely sell stocks they expect to rise—but not a wholesale exit; SoftBank’s sale was less bearish because proceeds were being rotated into riskier OpenAI exposure.
Tomasz instead watched Oracle credit-default swaps trading around three times Amazon, Microsoft and other peers. Absolute default probability remained low, but the move showed creditors repricing the debt financing behind Oracle’s data-center commitments to OpenAI.
Rory linked debt and equity signals: the market-cap gain created by Oracle’s announced deal had completely unwound, leaving the core company below its pre-announcement value. Equity investors were discounting a risky contract while creditors demanded more compensation to insure the associated borrowing.
Other marginal warnings included record auto-loan delinquencies among subprime borrowers over the cited 60-day period, Blue Owl freezing redemptions in one non-traded BDC vehicle while moving it into another, and the First Brands default. None was a “big screaming flag,” but together they showed risk perception spreading.

11. AI infrastructure is running above its comfort speed

Tomasz said data-center capital expenditure was moving from roughly $500 billion annually toward $800 billion or more, amid circularity questions around a cited $15 billion investment involving Microsoft, NVIDIA and Anthropic. Yet hyperscaler GPU capacity remained sold out for two years, and their debt was small relative to free cash flow.
NVIDIA’s concentration was the harder structural concern: Tomasz stated that two customers represented more than 40% of revenue and that 4% represented more than 50%. He calculated that concentration at roughly 10 times Lucent’s during the dot-com period, although NVIDIA’s largest customers—Google, Meta and peers—generate ample cash and can stop spending voluntarily.
The trigger would be an inference-demand shortfall: if a hyperscaler built capacity and could fill only 80%, investors would question every unfinished data center behind it. “If there's some wobble, the magnitude of the correction will be fast and brutal”; the economy is traveling “1,000 miles an hour on a car that's designed to go 999.”
Rory’s upside case was physical constraint. If unavailable power prevents another ten data centers from connecting, spending can slow without anyone admitting demand vanished; that is less destabilizing than opening a completed facility where “nobody came” and immediately impairing the other 20 in development.

12. A secular AI boom can still contain repeated 30–40% drawdowns

Rory began with “Zero” when asked about three or four years of uninterrupted smooth sailing, then floated “maybe 10%, 20%.” Jason recalled SaaS falling 30–40% in roughly two weeks during 2016 and expected several similar corrections en route to a world where “data centers are the new cities.”
The long-term chart can conceal intolerable holding periods. Harry noted the Nasdaq’s 2001–02 decline was roughly 70–80% and took 16 years to recover; he said anyone nauseated by a 4–5% move should reassess asset allocation and that he was adding some cash. Rory’s advice was not to look when scared.
Rory repeated the behavioral advice, “If you're scared, don't look.” Early-stage founders appeared to follow it: Harry described YC companies raising $5 million, immediately opening subsequent notes and treating $50 million post-money as standard despite public-market weakness.
Rory saw no contradiction in founders exploiting plentiful capital just as VCs become hard-nosed when money is scarce. The character test is interpersonal—“life is long”—but the market was indisputably pro-entrepreneur, making nostalgia for a different balance of power economically irrelevant.

13. Venture’s path to $500 billion depends on a few correlated winners

Tomasz put US venture deployment around $270–275 billion today, versus $8 billion in 2008 and roughly $300 billion in 2021, and asked whether it reaches $500 billion by 2030. Rory added the missing cycle: the industry had already reached $100 billion in 1999 before collapsing to $8 billion.
Rory cited Excel’s GlobalScape estimate of $184 billion invested this year versus $183 billion at the 2021 peak, but roughly half went into four companies. Outside those names, conditions remained closer to 2020, producing a bimodal market of major AI companies and select accelerators against approximately 900 unicorns with no obvious IPO or private-equity buyer.
Rory reduced the industry forecast to returns: capital will keep arriving until excess money kills them. Because four or five companies represent roughly 40% of the industry, the pooled outcome increasingly depends on OpenAI, Anthropic, xAI, SpaceX and their peers overwhelming failures elsewhere.
Harry emphasized the downstream multiplication through LP portfolios and SPVs, reaching “dentists” and thousands of indirect holders. Rory’s summary was stark: “The bet is on, and the bet is singular and utterly correlated.”

14. GC AI shows how to pay up without underwriting burn

Rory said his firm discovered GC AI while referencing another legal-technology company. Customers consistently knew and liked the product, adoption was strong and barriers were low because it addressed daily work for in-house legal teams rather than corporate law firms. GC AI raised from Scale at a $550 million post-money valuation.
Comfort came from efficiency as much as growth. GC AI was profitable, had not spent its previous round and used an elegant, demand-led distribution strategy; Rory’s rule was to avoid combining a high entry price with high burn.
He also rejected venture “kingmaking” as dispositive. A fashionable firm can improve recruiting and visibility, but corporate buyers do not purchase bad software because Sequoia invested: “The customers decide,” and sustained customer love can overcome a rival’s financing advantage.
The quickfire reinforced the boundary. Tomasz and Jason preferred Legora at $2 billion to Harvey at $8 billion because the category’s $30 billion outcome remained uncertain—precisely where Rory believes entry price must still govern underwriting.

15. An access premium gives Stripe little reason to list

Stripe’s tender at an all-time high of $41 illustrated Tomasz’s “new public market.” He compared roughly $1 million of legal expense for a late private round with $25–30 million to go public, including the traditional 6–7% fee on a $200–300 million offering.
The old rule assigned private companies a 20–30% illiquidity discount to public multiples. Harry and Tomasz argued it may have inverted into a 20–30% “access premium”: coveted private shares cost more, while issuers receive cheaper capital, fewer transaction costs and no quarterly-earnings burden.
Rory limited that privilege to a small group with persistent Silicon Valley cachet—Stripe, the leading AI models and similar names. Most merely good cloud companies still need public markets because private buyers will not supply repeated $200–300 million financings and employee tenders indefinitely.
Tomasz guessed OpenAI could list in Q3 2026; Rory said Q3 or Q4 2026, while Jason expected alternative financing to push it into mid-2027. Tomasz argued that if he had no shares, he would not be dilution-sensitive; Jason found it bizarre for a leader to be motivated by “world domination” rather than conventional economic incentives.

16. Retail and secondaries are constructing a private public market

Tomasz’s retail pathway runs from a 401(k) into an ETF, then a fund of funds and ultimately venture. Harry cited Coatue’s $3 billion in retail funds and GC’s expansion efforts, arguing the money could arrive within 24–36 months while poor-return recognition takes five to seven years.
The cautionary analogue was Blackstone’s roughly $21 billion retail real-estate vehicle and its redemption problems. Venture marks may remain untouched for 12–18 months or longer, so liquid retail liabilities can sit against assets whose weakening values remain invisible.
Secondaries are already expanding: Tomasz put them at roughly 25% of private-equity dollars, historically 2–3% of venture and now 10–12%. He preferred measuring total liquidity across IPOs, M&A and secondaries rather than treating a weak IPO year as proof that exits disappeared.
For a fund-returner with a 15-year path to liquidity, Tomasz described incremental selling: a venture firm sells a quarter several rounds later, then additional pieces at subsequent marks—“dollar cost my way out.” Rory accepted that private investors are learning to behave like public shareholders through a less efficient venue.

17. The IPO debate turns on fees, retail demand and the next crash

Tomasz saw Goldman’s purchase of Industry Ventures, reportedly at an exceptionally high asset-manager multiple, as evidence that incoming retail money needs secondary exposure. A market-clearing price should emerge for companies ranked roughly two through 200, while the 900 stranded unicorns create a restructuring or buyout business somewhere between zero and their old marks.
Rory still believes the largest venture exits ultimately need IPOs because venture returns depend on a few genuinely extraordinary companies, not private-equity-style packaging of consistently adequate assets. He also noted private capital’s aggregate two-and-20 burden versus roughly 60 basis points in public markets.
Tomasz’s answer was fee compression: late-stage retail products could approach the 65–75-basis-point load of publicly traded private-equity managers. He also cited private equity taking 12% of publicly traded software companies private in 2022; if there are only eight IPOs, publicly traded software risks becoming “a dying breed.”
The unresolved variable is a real down market. Until one removes private liquidity, every trend favors recurring tenders and fewer listings; afterward, holders may rediscover why public markets exist. Rory’s warning to future retail managers: eventually they may spend ten annual meetings explaining why “you've made a ton of money and they've lost.”

Rory O'Driscoll

Entry price counts when TAM is unclear. Winning is the only thing that counts when TAM is huge.

Harry Stebbings

If you're not seeing massive TAM expansion, there's just no point in even playing as VCs.

Tom Tunguz

Coding is no longer on this extremely steep improvement path. As the models improve in performance dramatically, people switch.

Rory O'Driscoll

To say that would be ugly would be an understatement. It would be terrifying—beyond terrifying.

Tom Tunguz

I think we're at a point where, if there's some wobble, the magnitude of the correction will be fast and brutal.

Harry Stebbings

Guys, I am so excited for this. It's always my favorite show to do. We have the wonderful Tom Tunguz joining us today. Tom, welcome to this wonderful trio. It's so great to have you.

Tom Tunguz

Thrilled to be here. Thanks for having me on.

Harry Stebbings

Not at all.

Rory O'Driscoll

Tom, I've got to say, have you become so Americanized, Tomasz, that you're just going with Tom now? Or are you just recognizing that Harry, like all English people, has no command of foreign languages?

Harry Stebbings

Sorry, I didn't understand that.

Rory O'Driscoll

Would you like him to use your given name, Tom? Are we going to stick with what Harry said?

Tom Tunguz

Oh, Tom's great.

Harry Stebbings

Yeah.

Tom Tunguz

That's great. Let's roll with it. Let's be brief.

Rory O'Driscoll

We've become an American.

Tom Tunguz

Let's get to the point.

Rory O'Driscoll

Tom it is.

Tom Tunguz

Yeah.

Harry Stebbings

Don't worry, Tom. Rory will remain this obnoxious way for the following 90 minutes. It's all good. I've gotten used to it. He'll correct your punctuation next.

1. Cursor Raises $2.3 Billion

But I want to start on some very exciting news for Cursor: $2.3 billion at a $29.3 billion valuation. Andreessen Horowitz, Thrive, Coatue, DST, and Accel—all the big players involved. Chaps, how did we analyze this? I look at this and honestly feel more irrelevant than I've ever felt. How should we look at this? This is a free-for-all.

Tom Tunguz

I mean, look, I think product-market fit for agentic coding is probably the best of any use case aside from search. And then you have this massive growth. So I think the bull case is that the productivity gains for software engineers here are pretty enormous—30% to 70%, depending on which company you're looking at.

You have pretty significant multiple expansion. I'm not sure if you guys have played with the new Cursor model, but it's phenomenal. It's unbelievably fast—4 or 5 times faster on a tokens-per-second basis—and that allows them to capture a whole bunch of margin. And then, on a multiples basis, it's actually not that wild. You put all those things together, plus the buoyancy in the market, and so you see a valuation here. I mean, can you see a 3x? You don't have a lot of ESOP dilution because total employee count is 30.

Jason Lemkin

Is it still 30?

Tom Tunguz

They just hired a PM 4 months ago, so—

Harry Stebbings

Okay.

Tom Tunguz

—they increased headcount by 5%. But you don't have a lot of the CapEx dilution that you always see within the foundation models. And so, does it go public? You have massive revenue growth, increasing margin, but a pretty attractive financial profile.

We can debate the entry price, but I think it's a classic bull-market bet. The big question is this: We were looking at a bunch of the vibe-coding companies, and typical gross account retention is 50%. So what does that really mean in this business? Can they push any higher price? I think that's probably the ultimate determining question. But, given the usage that we see, I can see the case. I can see the case.

2. The Developer TAM Expands

Jason Lemkin

There are 2 thoughts to add onto it. One, I think this idea that you get a 30% to 70% productivity boost is almost a backwards way of looking at it, because the way I think about it now is that it's just default and necessary. This is the way we code.

So if we were talking earlier in the year—even if we were at SaaStr in May—we were talking about productivity boosts, right? What are you getting out of Cursor and Windsurf and all? I don't know anybody who's not using Cursor or something. It's moved to the point where we're going to approach 100% penetration per developer at some sort of price per year—$5,000, $6,000.

You guys, Rory and Tomasz, are better at math than me. Before we even get to Replit and Lovable, the prosumer products for engineers, how many engineers are there on planet Earth today, and what's $5,000 times that? Seriously, we're going to have 100% penetration, right?

Tom Tunguz

Yeah, no, I agree with you. So when I used to do market-sizing models, 5 years ago, we used to assume that there were 25 million to 30 million developers. In the most recent Microsoft transcript from the earnings, they're talking about 100 million to 150 million developers just on GitHub.

Jason Lemkin

Okay, so 200 million times $5,000. How much is that, Rory?

Rory O'Driscoll

Yeah, 200 million. I mean, look, 200 million times $1,000 is $200 billion.

Jason Lemkin

No, $5,000. $5,000 a year.

Rory O'Driscoll

I don't buy that for a second.

Jason Lemkin

I think Cursor can do $1 trillion. Okay, it could do $500 billion, right? Seriously, this is what we're missing. This is all—the whole AI play to me. If you're not seeing massive TAM expansion, there's just no point in even playing as VCs.

Tom Tunguz

Okay, so I was chatting with a sales leader last night. He's a mid-market seller in an agentic company, and I asked him, "How many figures are in your mid-market deals?" I think of a mid-market deal—for me, a mid-market deal is $20,000 to $50,000. $50,000 on the high end, maybe $75,000.

Harry Stebbings

Yeah.

Tom Tunguz

He said they're all 7 figures.

Jason Lemkin

Tom Tunguz

Yeah. So he's at an agentic software company, and the mid-market is high 6 to low 7 figures.

Jason Lemkin

Yeah. That's TAM expansion.

Rory O'Driscoll

That's TAM expansion.

Tom Tunguz

It's labor replacement in some form or another, right? And so, to that point, if the total number of developers increases... And look, willingness to pay—I pay for Claude Code Max; I pay $200 a month.

Rory O'Driscoll

Yeah, and you run out.

Tom Tunguz

I run out 2 days into the week, right? So now I'm at a place where, okay, do I buy 2 additional seats, 3 additional seats? Instead of spending $200 a month, I'm spending $1,000 a month, and switching between these keys is a total pain. It makes me wonder: What is my willingness to pay for Claude? I will never go back to using a computer without Claude Code. I couldn't imagine it.

Rory O'Driscoll

And that sound you hear is them creating the Tomasz $300- or $400-a-month plan because they need it.

Jason Lemkin

You don't want to know what I spend on Replit.

Rory O'Driscoll

It's more expensive.

Harry Stebbings

And you would never go back, right? There's no way.

Rory O'Driscoll

Well, they're different. Cursor is never going back. I actually think, now that we do the math, we said 100 million active developers. Sorry, maybe I got the math wrong, right?

Tomasz Tunguz

Yeah, I think that's right.

Jason Lemkin

I think everyone's gonna pay $400 to $500 a month ultimately, no matter where they are, so that's $1 trillion. We're coming up on $1 trillion. I think that's real, and maybe Cursor gets 30% of it, we could argue, right? Then we could back into whether it's a good deal. Then Replit, Lovable, Base44, and friends—that's the other couple hundred million people. Tomasz, I've shipped 12 apps since June on Replit: 12 apps used 700,000 times. I built product, but I don't code, right? That's a whole other TAM.

Tomasz Tunguz

But that's 3% to 5% of US GDP. I mean, if we're talking about $1 trillion—

Jason Lemkin

Well, that's global. You said global developers, right?

Tomasz Tunguz

Okay, fair, but most of the money will accrue to US companies.

Rory O'Driscoll

Wait. Any software business is 50% US, even though—what is it?

Okay, so that's 2% of GDP, right?

Harry Stebbings

Yeah.

Jason Lemkin

Most of us aren't even gonna be working in 5 years. So 2% of GDP is necessary because no one wants to work; no one wants to be a hands-on-keyboard executive. No one graduating from college that I know wants to work, right? So 2% sounds low to me.

Look, I'm gonna call it. It won't be 2% or anything like it, but it can still be huge. You multiply 100 million by $5,000 a pop, and you get a huge number. You can narrow this thing down to quote-unquote serious developers. You get, I think, 3 or 4 in the US, right? A really serious one: "I'm paid to code 8 hours a day, 5 days a week." You can still multiply that by $5,000 a year and get a huge company.

So I think the aha here is—I mean, I'm just going back to the question. Call me boring. The Harry question is at roughly $30 billion for $1 billion in revenue is just crazy, right? And the proof of it is that I struggle more to get the con side than the pro side. Look, the pro side is revenue, revenue growth rate, and probably TAM. If something's gone from 1 to 100 a year ago, and it's gone from 100 to $1 billion this year, it's hard to imagine, with that—Newton's laws of motion require it to go to $3 billion or $4 billion next year. So suddenly you're in this thing at 10 times NTM revenues.

On revenue and revenue growth, and we just did it on TAM, all of these are great. So, yeah, if you're trying to come up with an argument against, the 2 ones I hear are profitability and moat, and I'd love to talk about those. And, Tom, maybe you have some insight into that. Let's talk profitability. You had a whole bunch of, "Oh my God, the gross margin on these things isn't great." Sometimes you hear it isn't great; sometimes you hear it's awful. Obviously, all that money's flowing to Anthropic, and we'll come back to that. But it is also noteworthy that they talked about building their own model, which, of course, will allow them to capture that revenue. So I don't have compelling data on that, but I'd love to hear people's thoughts on profitability and gross margins for these businesses.

Tom Tunguz

My pushback on the con side would just be the emphasis and the focus that OpenAI and Anthropic are placing on Codex and on Claude Code, and then your alternative players like Cognition—

3. Profitability And Durability

Rory O'Driscoll

I said there are 2 negatives, and I'm gonna list them: profitability and durability. Profitability is, do you make money? Durability is, is someone else gonna take your money? I think those are the only 2 issues, which is amazing. Just think about it. It's a $30 billion market-cap deal where, on a revenue, revenue-growth, and TAM perspective, it's big, resounding yeses: revenue scale, hypergrowth, huge market. Yes, yes, yes.

So you're right, the 2 are profitability and then competition and durability. So let's do them in turn, because I think they are linked, Harry. You're right. The odd thing about the current business is their direct competitor is also currently their supplier of the raw ingredient that makes 50%, 60%, 70% of their product. It's a very weird platform-risk kind of deal, and maybe you can just lump them in together. Look, with 100-odd employees, it ain't labor that's killing them. It's the cost of the tokens, which is money they give to the company that also has a competing product. So, Tom, I'd love to hear your thought. How do you think about Claude Code versus Cursor?

Tomasz Tunguz

The way I'd put it is, as the models improve in performance dramatically, people switch. Gemini 3 just came out. It's a little bit better than Claude 405 Sonnet on coding. That's what matters to this audience. When there's a lot of improvement, people switch. I want to see: is the Cursor model a whole lot better than the Claude model? 405 comes out of OpenAI, great. I want to go—uh, 401. I want to go check out that model on Codex.

But as the improvements in coding start to asymptote, I'm going to stay where I am. I'm going to stay where I am because there's memory, and it remembers how I program, and it remembers my linting, which is how many tabs I put into each particular function. I think we're at a place where agentic coding is no longer on this extremely steep improvement path, and so people will stay where they are.

I have 100 tools in Claude Code. Claude Code wrote all of them, and now I have this whole setup where it does all kinds of stuff for me. Sure, I told Gemini this morning, when Gemini 3 launched, "Look at everything that I've done in Claude Code and migrate it so that you can use it," and it'll migrate. But I will only do that if I think that the benefit of the migration is significant.

If you look at the initial distribution of Cursor, what fraction of people are really going to switch? Especially once the enterprise business starts to come in, because Fortune 500 companies will pick one, standardize, buy effectively an ELA, and then switching diminishes. And so I think they'll be able to improve margins. As long as they're able to continue to grow, I bet they hold on—I don't know—75% of their audience 5 years from now, something like that. And so, to your point, Rory, on just inertia in the business, it will be there.

Jason Lemkin

What I don't get—here's where I'm ignorant, and here's where the difference between Replit and Lovable is so different, right? Replit and Lovable, frankly, are using cheap models most people don't know or care about, and they're well marked up. The gross margins are north of 50%, okay? We're not bouncing back and forth between the latest Gemini and 4.5, right? In fact, Replit defaults you to an N-minus-one model unless you want to pay more, okay? And it works fine for that use case.

What I still remain ignorant of, even as we're talking about it, is this: I think Cursor has a moat and has switching costs, and enterprise ELAs and others will lock in. But ultimately, even with mixing in their own model, which may not even have that much higher margins, right? It'll have higher margins, but how do they get to 60% gross margins? How do they get there, right? But I totally get how Replit and Lovable are already at 50%.

Tomasz Tunguz

Yeah, I mean, I don't know either. But we've met a bunch of different companies, and they're taking big models and then distilling them into small models. We've done this internally. We've taken Claude Code, which is, I don't know, a trillion-parameter model, and then we've taken a 20-billion-parameter model and said, "Claude Code, teach this little model how to call tools." I mean, this is a venture capital firm. Yes, we have a great head of AI, but we're not a research lab, and we can get to 97% equivalency on that tool-calling distillation with a model that's 1/150th the size.

Anyway, the point is, I think there's so much efficiency to squeeze out of these model architectures because there's just a lot of fat in these systems. Candidly, I don't know if any of these companies achieve 60% to 70%. I mean, we all know publicly traded software companies from the previous era were at 70% or 72% gross margin. I don't know if we ever get to that place, but the other point is, do they need to?

Rory O'Driscoll

You don't need to. Absolutely. You're exactly right, because those companies were selling workflow software with a big sales force and lots of integrations. Here, you're selling a tool that people can turn on and use themselves. You've got low sales and marketing costs. In the end, things are valued on a multiple of free cash flow, in the end, in the limit. And I'm kind of with you. I think that, as I listen to this whole discussion, if we buy the durability thing—in other words, most people won't switch once you asymptote out—then the only, quote-unquote, "negative" is this gross-margin issue.

And I think you're right, Tom, that if the only thing between you and, you know, $50 billion or $60 billion is your ability to chip away at a digital product where there's a ton of optimization to be done, my guess is you'll find a way to get it done.

Tomasz Tunguz

You'll get there.

Rory O'Driscoll

It mightn't be 80%, but if you can get to 60% gross margin and sell $1 billion in revenue with 100 headcount, you're gonna be kicking off cash.

Tomasz Tunguz

Totally. Microsoft also said that, compared with 12 months ago, they were producing 90% more tokens per GPU hour than 12 months ago. So, yeah, that's the rate of efficiency gain.

4. The Coding War Leaders

Harry Stebbings

So, 1, 2, and 3 in this space in 5 years' time—who are gonna be the top 1, 2, and 3 players? Assign market ownership to each of them before we move on. I think Codex is gonna have 60%, Anthropic's gonna have 20%, and Cursor's gonna have 20%, for example.

Rory O'Driscoll

My gut would be Cursor because they're there and they're ahead. GitHub because they'll bundle, and it's Microsoft, so a whole bunch of corporate America will just go with that. It's like the Zoom versus Teams discussion. There'll be bundled people, so those are the two.

The third you have to put Anthropic in because they're relevant, and/or Cognition just because it's slightly different. Which leads me to assume Codex isn't a huge player here. I just did that on the fly, but I think that you throw out Codex, which is OpenAI, obviously, and look at people who have a natural lock on the space.

You have the people who are first, which is Cursor. You have the people who can bundle, which is Microsoft at the enterprise level, at the distribution level. You have the people who can bundle at the model level, which is Anthropic. And then you've got the clever guys out in the corner. It's a crowded space. I don't know if you put OpenAI in the top 3 in this space.

Tom Blomfield

I agree with Rory. I think it's a very astute assessment. I think Cursor has 40% to 60% share. Microsoft really needs to step up its product. They really had it. They had the market locked up, and then I don't even know what the agentic Microsoft coding product is. It's definitely not the tab autocomplete, which is the last time I used it.

But maybe it's bundled within VS Code. They can come out the way they did with Teams and come out of nowhere. So if it's in 5 years, yes, in years 4 and 5, are they probably the number 2 player? It's right on the money. And then Anthropic is just so good at coding, and it seems like that's where they're focused. So that's 1, 2, 3: 60/20/20, something like that?

Jason Calacanis

I could provide a slightly different perspective. The latest version of Replit v3 blows everything out of the water. It's not just night and day; it's what's more than night and day. It's Pluto and Mercury, okay?

In v3 now, agents talk to agents. It calls in an architect and reviews my code. It calls in a different agent and finds bugs. It calls in a different agent to review what it has. It has an unlimited context window that appears to go on for months now and remembers everything we've done.

My point is, the rate of change is so high on this side of things that I'm not betting there won't be someone else in 18 months who blows everyone out of the water. Do I think someone can invest what Anthropic and OpenAI can invest? Hard to imagine. How much have they raised? A lot, okay? So I don't know that you can build that, but in terms of building a layer on top of other models, there's a level of disruption to come that I don't think we've even touched on yet. It's just so much different and so much better.

For me, now that the Replit agents are so good and so autonomous, and this is true for all of software, the biggest issue is QA. What if there was a version that could truly do all functional QA agentically? That would be another step function. Then I'd be 10 times more productive.

I think all these leaders are too big to go away, but if 30 kids at Cursor can build this into a billion-dollar company, are you sure it's just 30 kids? Because AI isn't static. This rate of change is so crazy. I know Gemini feels like 8% better than 4 or 5 Sonnet, but in a year, what we can do with it—we may underpredict what we can do in a year.

Rory O'Driscoll

I wonder, is that correct? There's one world that says the window opens with a new technical discontinuity, and there's 3 or 4 years where it's up for grabs. Then things start to coalesce and settle, less because the technology is not continuing to train, but more because enterprise moats come in. You make a decision, you get locked in, a corporation buys for its people, and then market share becomes harder to move.

Yes, another revolutionary step-function change in the AI underpinnings and the models could cause that to happen. But my base case is that it will start to coalesce more and that market shares will become less subject to flux. In other words, people will settle into their rough market share, and that's been typical for most markets.

There's this new wild period, but after about 3 or 4 years, you grab what share you can. Then, in most other markets, there's a long 10-year or 20-year period where, even though the market doubles, trebles, or 10Xs, the rough market share at the start is the rough market share at the end.

Jason Lemkin

But I don't think we've ever seen software get remotely this good this quickly in our lifetimes. It's like 2 orders of magnitude faster. Software used to get better maybe every 5 years. You'd have a major release, and it would have an API. It would integrate with Looker. That would be the big deal that year: We got our Looker integration working.

Rory O'Driscoll

The argument back is that Intel doubled every 18 months, whatever, and market share didn't move for 15 or 20 years throughout the entire life cycle of the CPU. Massive performance increases on their own often aren't enough to cause market-share shifts once they get embedded in.

Intuitively, 4 years ago, no one did coding using AI. Now everyone's doing coding using AI. There was a 4-year period where everyone would have to pick their AI coder. Once you've done that, are you just going to lie back and say, "The AI coding company will just make my shit better?" As Tom said, is he going to be in the market to shift 2 years from now, provided they all stay roughly comparable? I think it's at least plausible that the balance of probability is no. Sorry, Tom.

Tom Loverro

No, no, no. I'm trying to figure out the right blog post for this debate. I think it's the bacon-in-the-skillet debate: When does the fat congeal?

Jason Lemkin

Yes.

Tom Loverro

Right? Right now, everything is hot, everything's moving around, there's a lot of sizzle, and then all of a sudden the heat comes off and everything's fixed, right? It's just much harder to move through.

Rory O'Driscoll

Yes. I love it.

Tom Loverro

And when does that happen? I think that's the debate. When does that happen? Jason's perspective is that probably doesn't happen for a while because the skillet's going to be cooking on 10 for a long time.

Jason Lemkin

Let me give you another version of that. We rolled out Agentforce for Salesforce. We're probably one of the few organizations of our size to have rolled out Agentforce, okay?

The interesting part is, we took the prompt from another AI agent that we trained for months and gave it to Agentforce. We iterated on it with Agentforce for about a day, and it worked just as well. The point of the story is these moats are real, okay? But if I could move that prompt and all that learning from one agent into Agentforce, don't overestimate your moats today. It's just the meta-learning. They're there, but I think they're lower.

5. The Price War Risk

Tom Loverro

So, just on that point, let's talk about commoditization, right? We talked about moats at the beginning. The markets are growing incredibly quickly, and so you have technologies where you could see rapid commoditization and deflation in pricing power.

Jason Lemkin

I'm hoping.

Tom Loverro

You're hoping we see that?

Jason Lemkin

I think at 100 grand per agent, there's only so many that I can buy. I need these fees. I need a little bit of that fee stream to increase, to go beyond 12 agents in production.

Rory O'Driscoll

Let's just ask that quickly. I want to drill down on the word "deflation," because there could be 2 meanings to that word. One of them is the BLS meaning—the Bureau of Labor Statistics—and then the other one is the terrifying one.

The BLS meaning is, "Oh my God, this year I get 1 million tokens. Next year, for the same price, I get 2 million tokens." At some macro level, I've had more increase in value. I'm still paying roughly the same amount. It's not catastrophic. It's not an implosion, right? That, to me, is what's happening right now. Agreed? It's roughly that trajectory.

But you hinted at something that, if true, would be something more than that. It's where you suddenly see—

Price erosion.

Tom Loverro

Price wars.

Rory O'Driscoll

Price war.

Tom Loverro

What if there's a price war?

Rory O'Driscoll

Yes, and it's worth pausing on this because it's the only bad scenario, and we never saw that in SaaS. We never saw it, with few exceptions. I remember Box had to compete against Microsoft, which was free, but most of the time there wasn't this.

What you're positing, Tom, is that a year from now, the product manager at Anthropic says, "Screw it, I want to win in Claude Code. I'm going to go from $100 to $50 a pop." The other guys have to respond. Or maybe it's because people are embedded, and some product leader says the only way to change that is to go down in price.

Tom Loverro

Yes, and it's not numbers 1 and 2 in the market; it's numbers 3, 4, and 5. They say, "We have to win significant share. How will we win share? We win share by underpricing." And then what happens?

Jason Lemkin

But that's not new. There's always been a low-end version of every product we can think of in the market. I'm not saying it's not new; I'm just understanding the point. There's always been a low-end CRM. There's always been a low-end everything in the market. There's always been a $5-a-month version of CRM. It didn't stop Salesforce from getting to almost $50 billion in revenue, right?

Tom Loverro

Right. But to your point, Jason, if I can take a prompt out of one agent and put it into another...

Jason Lemkin

Yeah, it's riskier. Your point is that it adds to the risk because of that portability from the product—or even using the low-end clone in CRM, but adding that enterprise-grade product and having the prompt work just as well. That's very disruptive, because then maybe I pay—actually pay—the same for the AI, but for the core CRM I pay $5 a seat instead of $300.

Tom Loverro

Well, and then the time to ship the feature to compete is much less. Go ahead, Rory. Sorry, it was up to you.

Yeah.

Rory O'Driscoll

I've got to take two extremes to encapsulate this price-war comment. Subscription-revenue enterprise software that's embedded with a whole bunch of integrations, like Salesforce, is almost immune to price wars. Even if the other shit's cheaper, you're like, “I'm not going to rip it out,” right? So there's some mild price pressure, but they're indifferent.

The other extreme is classic product DRAM. We don't talk about the DRAM wars now, but commodity memory semiconductor chips glut, and then they go short every 6, 12, or 18 months, and your pricing spikes 5x. You're loyal to Samsung for 30 seconds. Then, because it's an embedded product, the end user doesn't care, and 6 months later the prices have gone down—not a 10% decline, to Tom's point, but a 50% or 80% decline—and they're a commodity. Someone's now buying them from Hynix or Microchip for one-tenth the price.

Those are the 2 extremes, and we mentally always assume that most software products are a bit below Salesforce: less sticky than Salesforce if it's lovable, but still in the sticky category. If anything like that semiconductor DRAM product-type commoditization took place, to say that would be ugly would be an understatement. It would be terrifying—beyond terrifying. If GPUs became more like DRAM, it would not be pretty out there.

Tom Loverro

No, and it hinges on how easy it is for a mid-market or an enterprise to switch. What abstraction layers can they impose as a business? You could imagine—look at Iceberg within the data ecosystem, right? Snowflake captured compute and storage, and then an open-source technology came and made large enterprises realize, “I want to control my own data, and I want to store it.”

And so Snowflake says, “I'm going to take this out of your business, and I'm going to hold on to it, and I'll selectively give you access to it.” So, Jason, what if you had a database of all those prompts and you fed them selectively into different agents?

Jason Lemkin

You can. Two thoughts. One, this is tough. We essentially have 12 AI agents running now at Aster—more than humans, okay? And we have 5 SDRs and BDRs running from different instances and different vendors.

I've been a Salesforce customer since the beginning, but now they've turned it almost into a database for us because we interact with the agents. We don't log into Salesforce, we don't talk to Salesforce; we talk to Agentforce, Qualified, or Artisan. Some of what you're saying has already happened to us.

That's why Salesforce has to win with Agentforce, because these agents are the most important part of the stack. It can lead to a lot of portability—portability of data or even just portability of value. To me, that's what I'm learning. It's portability of value. Old-school guys have to win the agent wars, or the value just leaks out of their platforms. Even if the logos are retained, the value's just leaking, slowly leaking out every week.

Rory O'Driscoll

Yes, they would be in the category of the thing you sell. The existing product you sell, as Salesforce, is still wildly sticky, but nobody cares and all the extra money went elsewhere. So you just flatten out, and obviously your market cap reflects 10% growth, not 50% growth.

Jason Lemkin

Yeah, but if you can somehow monetize these agents, that's interesting. Going to the deflation question, the other interesting thing—what I've learned from the GTM agents, right? I think there will be a price war coming, but right now there isn't. Right now they basically all cost $100,000 to start, but the cheapest entry price is like $50,000 to $70,000, plus $25,000 of an FTE to get going—a forward-deployed engineer. So you're talking about $100,000 to get going.

They're not rampantly discounting it for a lot of reasons. If that price war were to come, all of this massive ARR growth we're seeing in these vendors would deflate rapidly, right? If instead of being a $100,000 product, they were a $2,000 product, it'd be tough in venture.

Tom Loverro

Look, I don't think it's going to happen. I just think it's important to raise the question because I suspect maybe in 1 or 2 categories this does happen, where you start to have—

Rory O'Driscoll

I think that's the right statement. It could happen in other areas more quickly. If it's going to show up, it's going to show up in core API pricing, coding agents, and the Lovables. That's where it's more likely.

Jason Lemkin

But if you're out there charging $100,000 a year for your agent with super-happy customers—this is Tom's point—they're great. It's working great. It's wonderful. But I can take that prompt and just a little bit of history, just a little bit of abstracted data, and move it to a $10,000-a-year tool. When things are a little less frothy and AI budgets are a little more stable, moving that $100,000 or $200,000 to a $20,000-a-year agent might be appealing.

Rory O'Driscoll

I remember looking at churn in SaaS companies, and the number-one predictor of retention was the number of integrations. Going back to your point, if it's easy to rip it out, you will rip it out if it's cheaper, and if it's hard to rip it out, you won't bother.

So I agree: if you are just literally—your concept of a database of prompts, and you are interchangeable—then it's like, you're right, it's a big sign saying, “Cut me now when you have to save $80,000.” But if you're integrated to 5 things and you're like, “Oh my God, we'll have to talk to IT,” then screw it.

6. Venture Becomes A Trading Market

Rory O'Driscoll

But can I, Harry, talk about a totally different topic, but on the same topic, as it were? I want to come back to your theory, Harry. Do you feel irrelevant, right? I think there was a fun point in that, because Cursor has had at least 3 rounds this year, and the first round was above $1 billion.

One of the most noticeable things about this year—and I have a stat for it—is the number of companies doing multiple rounds, obviously at significant step-ups in the same year.

Harry Stebbings

Yes.

Harry Stebbings

Can I just touch on that? Ramp was $13 billion at the start of this year. Now it's $32 billion, with the latest round announced yesterday.

Rory O'Driscoll

They've seen 4 rounds this year. I looked it up. Ramp's had 4 separate financings this year. To give a statistic on that, we look every year at the newly minted unicorns for that quarter, because that's mentally the outer edge of where we play. So I'm like, “Okay, what did we miss?”

There were something like 20 to 24 minted unicorns in Q1. By Q3, 15% of them already had a step-up, and now, with Cursor, some of them had 2. If you think about the velocity of step-ups, that's almost—normally you think your financing is 12 to 18 months. Fifteen percent of the companies you entered at $1 billion or above had already had a step-up within 6 months.

To your point, it seems like a high-velocity, big-numbers game, and it looks like a remarkably easy game from this. I'm sure it's not, but you're right. You look there and go, “Let me get this straight. You put in $100 million at $1 billion, and you have a 15% chance of being worth $2 billion within 6 months. Why not do that for a living?” I think that's what you're saying, Harry, effectively. Buy Ramp in January at $13 billion, sell Ramp at $26 billion in May.

Harry Stebbings

I'm saying, is my insertion point fundamentally challenged because it is just so much easier? And you say, “Oh, it's not easier, Harry.” It is. It absolutely is. With the brand and the platform that we have, access, to a certain extent, is the core challenge for most.

Respectfully, I could be doing $10 million to $25 million checks into these high-flyers, like your Harveys of the world that we've discussed before at length, and we would be able to get them, and I could get the step-up. But no, I go back to the craftsmanship of Seed and building companies in the trenches with entrepreneurs, and I'm thinking, “Why the fuck do I do that?”

Jason Lemkin

Well, I'll tell you what's interesting. Watching Bessemer, who's wildly successful in cloud and B2B, for generations just co-lead the last Ramp round. And they did Anthropic, what, about a year ago, right? And that's probably up 10x, right? So they did $100 million or something into Anthropic.

Harry Stebbings

Canva's so late. Byron, I love Byron, but—

Jason Lemkin

This is my observation from afar. They did Canva in 2021, and then I think maybe they had a little bit of shock. They're like, “Wow, maybe that's a great one. Maybe we overpaid.” Now they're in the money on it.

But then they did Anthropic, which seemed expensive. We should look it up. And then, going from that—being conservative but wildly successful, then going to Anthropic, then going to Ramp at $30 billion, saying the classic post, “We're so excited to partner together now”—Bessemer must think that is a low-risk investment.

That's what I'm saying. This is a venture capital firm that's been around since the 1800s, right? Or something like Bethlehem Steel or Bessemer Steel or something.

Harry Stebbings

They think Ramp at $30 billion is the best play in the market. I don't know what Thiel thinks, but it's to your point, right? This is not Tiger or SoftBank rolling the dice. This is Bessemer saying Ramp at $32 billion is a safe bet. Kleiner and Mamoon doing Anthropic at $180 billion—another example of that.

Rory O'Driscoll

I mean, one of the interesting things here is that a large number of the folks doing these kinds of rounds are not the late-stage crossover people who, to some extent, got snookered in 2021, licked their wounds, and crawled away. It's actually the great large early-stage, now multi-stage firms who are going—they're looking at the same map we just looked at in Cursor, and they're saying to themselves, "Risk-adjusted, is this just a great place to put my money?"

If you have the scale of capital to be relevant at that stage, because you can maybe show up, Harry, because you're a media celeb, but you're 25. Normally, they want to talk to people with 100-plus. If you have a fund that size, so far it's been a very excellent place to put one's money, and many of the big, what we would have called early-stage firms 10 or 15 years ago, are doing it.

You're right. It's the Bessemers, Kleiner—Lightspeed led, I think, the Ramp round. This stuff is working. I always used to say to my LPs, "The late-stage business is either the best business in the world or the worst business in the world, and there's nothing you can do to determine which it is."

When prices go up, putting in $100 million and having it go to $200 million with no effort on your side, that feels as good as life is going to get. Obviously, when prices go down, it ain't so much fun. See 2021 and 2022 for details.

Harry Stebbings

I think the secret to success in that business is just being a trader. I was walking in the park with a multibillionaire today who is in this market, and he is a trader, a ruthless trader. He buys at $60, sells at $180 in the same year, and it is absolutely a marked-to-market book that he manages. Not with the "ride your winners, hail this unicorn founder" approach. It's fucking trading.

Tom Loverro

It's the new public market.

Rory O'Driscoll

Yes, guys, with one huge fucking difference—excuse my language. There's no liquidity to the downside. It is the new public market because these are companies that, by any rational stretch, could be public today.

And Harry, you're right: in public markets, some people have a trading strategy and some people have a holding strategy. But the key sentence you're missing is you can't execute a trading strategy if they're private, because when things go wrong, the liquidity won't be there. When things go right, you can.

You can trade on your way up, but it will be a lot harder to get out of one of these investments on the downside because the liquidity will not be commensurate with the public markets.

Harry Stebbings

100%, but Rory, putting $25 million into any chosen company—I'm just making it up—Ramp at $13 billion, and then selling it at $32 billion now would not be difficult?

Rory O'Driscoll

No, you're exactly right. On the way up—let me repeat—on the way up, the late-stage business is the world's best business.

Harry Stebbings

But most are on the way up. We have our YOLO segment, which you've taken the piss out of me before, Rory. They're all just riding freaking high.

Rory O'Driscoll

But apparently, you might want to turn on your ticker for the last 24, 48, or 36 hours, but yes, in general, stocks go up.

Harry Stebbings

I did. There's so much red, Rory. There's so much red. Duolingo—it's like the Titanic. It's all under the surface, you know?

Rory O'Driscoll

Totally.

7. The AI Market Top

Harry Stebbings

Two elements concerned me this week. Well, there were several, to be honest. One was Thinking Machines Lab at $50 billion, and the other was Thiel and SoftBank exiting NVIDIA, and what it means for whether we're at the top of the market. Both were potential signs of a market top. When you look at those 2, can you unpack either of them—both of them? They both concerned me when I saw them.

Tom Loverro

The only thing I would note from the media is that Peter Thiel sold $100 million of NVIDIA. What's the dude worth? This is like me selling a tenth of a Bitcoin. I mean, it just isn't—

Rory O'Driscoll

The estimate's been $10 billion to $20 billion, so you're right, it's sub-1% of his net worth. Though I will say, it's been my life experience that people rarely sell stocks because they think they're going to go up.

So at some minor level, in the 10 seconds it took to run that decision by the big guy, he said, "Yeah, you should sell that stock." But you're right, it's not like he's unloading the way he was when he was unloading his Facebook position.

And again, on the NVIDIA one, I don't think there's any data in SoftBank selling. They just need that money—I mean, they're selling the profitable public company, NVIDIA, to put that money in OpenAI. This is a guy ramping up his risk. This is not a de-risking.

Tomasz Tunguz

The data points I'm paying attention to are in the credit market. I'm looking at Oracle credit default swaps, triple what Amazon and Microsoft and others are. I'm looking at, even in consumers—here's a data point—subprime borrowers in the past 60 days hit the highest delinquency rate on auto loans in recorded history.

And then you have Blue Owl, which has frozen redemptions for one non-traded BDC vehicle, and it's moving it into another one, right? And then you have the First Brands default on private credit.

Harry Stebbings

Can we just unpack those? You said something about the Oracle credit default swaps. Can you help me understand what's going on there and why that's important?

Tomasz Tunguz

Okay. Oracle has a big deal with OpenAI. Oracle needs to build lots of data centers. To build those data centers, they borrow money, like a mortgage. They've borrowed money, and there's a thing called a credit default swap, which you may remember from the Great Financial Crisis. It measures the odds that Oracle defaults on its debt: they cannot pay their mortgage.

Google and Microsoft and other major technology companies are at a certain level, which is basically the same rate as the federal government. Oracle is 3 times that in the last 3 or 4 days. So the risk is still quite small. The overall probability of an Oracle default is small. The magnitude of the move suggests a meaningful repricing of risk.

Rory O'Driscoll

I totally agree, and it's worth pointing out that at the same time, the entire value of the core Oracle deal—remember we talked about it when the stock price rose 33% and said that it was crazy?—that entire deal has been unwound.

The market cap of the core company is actually below where it was when the deal was announced, and I think both those data points are saying the same thing, which is, "Oracle, you've just underwritten a risky piece of business, so your equity's worth less, and I'm going to have to insure your debt."

All people at the margin are going, "Maybe I want to be one of the first people off this pain train, and maybe I can insure my risk, hedge my bets." That's the tell here.

Tomasz Tunguz

And so is it this big, screaming flag? No, it's not. It's just a data point. The market is starting to perceive an increasing amount of risk in some of these big contracts.

And then you have the Anthropic deals today from Microsoft and NVIDIA with a $15 billion investment, and the circularity questions and all those kinds of things. So people are perceiving more and more risk as the CapEx for data centers goes from $500 billion a year to $800 billion a year or more.

Harry Stebbings

Do you think there are any screaming flags from the last week?

Tomasz Tunguz

I don't think so. Most of the hyperscalers' GPU capacity is sold out for the next 2 years. They generate cash. The debt as a percentage of free cash flow is really small.

The major red flag for me is that customer concentration risk is higher than it's ever been. NVIDIA—2 customers for NVIDIA represent more than 40% of revenues. 4% represent more than 50% of revenues.

I went back and looked at the dot-com era, the networking companies. NVIDIA is 10 times more concentrated in terms of revenue than Lucent was. I think that's an issue. But most of NVIDIA's customers are super cash-flow-positive, right?

Google and Meta and others are spitting out cash, and they can decide to stop at basically whatever point. So I think it's all okay. How does this merry-go-round stop? If the game of musical chairs were to collapse and everyone falls on their ass, what happens is inference demand slows.

And if there's a hiccup—if Google says, "We built this amount of capacity and we can only fill 80%"—if that happens, then you see—

Rory O'Driscoll

You're about to learn something by doing this podcast on Tuesdays that you might not have internalized, but I'll tell you what it is. This thing comes out on Thursday, and NVIDIA reports on Wednesday night.

So we've now been pontificating, and one of 2 things is going to happen on Thursday when you, we, and the listeners are listening to this, right? If NVIDIA is steady as she goes and it's doing fine with a few little warnings, we will look like balanced and rational people.

If they pull the pin to the downside, we will look like the last men on the Titanic here, right? And it's terrifying because that's just the nature of the recording clock.

But now, to lash myself to that mast with you, Tom, I think you're right, and what you're not seeing is... And now I'm going to do something I hate doing: you're almost, to some extent, I suppose, predicting something that, by the time this is played, our listeners will know.

Rory O'Driscoll

What you’re not seeing is a mass collapse of demand or anything like that. You’re seeing really strong demand. All the hyperscalers are saying, “We want to buy more, we want to build more, we want to invest more.” The stuff is at the margins. The negatives are at the margins, which are the overleveraged people trying to do this.

People are correctly worried about their debt. The people who have both the balance sheet and the need for these products, on the other hand—the Microsofts and Googles—aren’t worried at all. In the middle, you have Meta, where it’s like, “You can afford it, but why are you doing this, dude?” So you internalize that. I doubt NVIDIA are going to get on a call tomorrow and say, “The margin’s gone down.” So all should be fine for a while.

It’s to your point: over the medium term, people are going, “Hmm, the debt that some of these folks are taking on, like Blue Owl, like Oracle, that’s just a risky bet if things turn down.”

Tomasz Tunguz

I think we’re at a point where, if there’s some wobble, the magnitude of the correction will be fast and brutal. Everyone knows the tachometer is at the red line. We are going as fast as we possibly can. In fact, we’re going so fast that we are, as an economy, really uncomfortable with it.

I was reading a macro hedge fund’s tweet last night, and he was talking about how, because the big companies are borrowing lots of money, they’re paying less in tax revenues to the US government. Those tax revenues are so significant that it actually will increase the national debt, right? This is where we are.

We are going 1,000 miles an hour in a car that’s designed to go 999, and so the whole thing is shaking.

Rory O'Driscoll

I totally agree. The fact that people argue about the depreciation schedules on GPUs, and the answer to that question can move the entire US stock market, is beyond bizarre. But you’re right. We are where we are. We’re making this bet, and even a mild slowdown would be painful.

My random theory is that, because no one can get the power to build these, we actually might be saved from ourselves. If no one has to say there’s no inference demand, and everyone just says, “Well, I would love to build those extra 10 data centers, but we just can’t get the power, so we’ll just gradually slow down the ramp,” maybe it’ll just slow a little bit less ostentatiously than if someone gets on a conference call and says, “We built another brand-new, spanking data center. We turned it on and nobody came.”

Because that’s the moment, as Tom said, where you go, “Hmm, maybe the other 20 we have in the works aren’t going to be worth much either.” Maybe our inability to connect power will save us from overcapacity, and that’s my upside case, people.

Harry Stebbings

What do you think the chance is that we actually just continue smooth sailing into the sunset and don’t hit an air pocket or a challenge for the next 3 to 4 years? What if we’re overestimating?

Rory O'Driscoll

Zero. Maybe 10%, 20%. I’d be more—

Harry Stebbings

Yeah, Jason.

Jason Lemkin

I think the past moves so much more slowly than the present in B2B. But if we go back through our history of SaaS, which we all can do, we had a lot of minor bumps on the way to the peaks. We had a meltdown in 2016 that we’ve all forgotten, I think, where SaaS fell 30% or 40% in 2 weeks. It was right during SaaStr Annual, right?

If you go back and squint at those charts, you’ll see massive corrections that then we fully rebounded from right until 2022. So why wouldn’t we have micro-massive corrections on the way to us all living in a data center, which I think we all are? I think data centers are the new cities. We’re building more data centers than offices, I think.

Why shouldn’t we have 30% or 40% corrections along the way? We should. How could there be no bumps, right? Maybe Oracle can’t get its debt refinanced. Maybe those CoreWeave contracts aren’t quite what we hoped, right? Maybe it’s something small. Maybe Nebius just has a bump and it creates a contagion in the market, or Microsoft has some issue.

Why should we not expect 3 to 4 little 30% to 40% drops? We’ve seen it before in our investing lifetimes.

Tomasz Tunguz

I’m trying to imagine what a house would look like with a white GPU fence.

Rory O'Driscoll

A white GPU fence.

David Friedberg

Harry Stebbings

Oh my God. That’s the theme—

It’s coming.

Rory O'Driscoll

—of the day. The new American dream. I love it: a white GPU fence, with a “Made in Taiwan” sign on it. How much more American can you get?

Jason Lemkin

It is coming. There’ll be more agents in this country than humans soon enough.

Tomasz Tunguz

Oh, yeah.

Jason Lemkin

No, for real. But it’s going to fundamentally change our lives. So that’s the part we’re missing: when there are more agents than humans.

Rory O'Driscoll

Linking it back to Tomasz’s comment, though, unfortunately, what they don’t do is pay their car loans. This is back to the comment on where the wider economy is. But just one comment on that crash comment, Jason: I remember 2016, and I even saw a tweet that showed the Nasdaq since 1981. They were saying, “Hey, it’s all fine,” and they had a little pointer to the 2001–2002 crash saying, “Look, in the scheme of things, it’s nothing,” because the line goes up and to the right.

Harry Stebbings

They’re entirely correct, but someone tweeted back and said, “Yes, but it took 16 years to get back to par.” The longer your time horizon, the more indifferent you can be. But if you find yourself on the wrong side of what was, in 2001, a 70% to 80% correction, I think clustered in the Nasdaq, it can hurt for a long time.

So my public-service announcement is: if you find yourself feeling pretty nauseous about the de minimis crash you’ve lived through in the last weeks—4% to 5% down, maybe 20% in a second—it sucks. You should just look long and hard at your asset allocation and maybe put a little more in cash. Because I’m doing that. I got a little scared and I was like, “Hmm, Rory, what are you doing here?”

Rory O’Driscoll

No, when you’re scared, you seriously don’t look. If you’ve been around for a little while, you have to learn: if you’re scared, don’t look. That’s the only thing you should do. Don’t look. It’s the best advice.

Harry Stebbings

If you’re scared, don’t look. That is the theme of this YC batch, I can tell you this week. I’m being serious. I’ve never seen such exuberance around a batch. I’m getting emails like, “Hey—

Rory O’Driscoll

They’re always the best batch ever, Harry. That’s the obligatory tweet you have to start doing.

Harry Stebbings

We’ve raised the $5 million round, and now we’ve opened up the next note for the next note on the note of the note.” I cannot tell you the exuberance there is. They’re good companies, but holy shit, the fear of public markets and impending doom has not reached early stage, baby. It’s like $50 million post, standard.

Are you seeing the same? Are you nervous like me? Also, a question for you: advice. I feel like it’s like you’re so lucky to have a meeting with me, and I’ll determine if I should ever take your money, Harry. And I’m like, “I haven’t even met you.” Am I being too romantic?

Rory O’Driscoll

The thing is this: when money is scarce, conditions toughen up, and frankly, VCs get pretty hard-nosed about allocating the capital. You’ve got to expect that when money is plentiful, entrepreneurs behave the same way. So some part of what you’re describing is legitimate.

The test of character is how you behave and how you act interpersonally in those times. When money is scarce, I think as a VC you have to allocate capital carefully, but you don’t have to be a dick. In the same way, you’re right: you see some behaviors now where it’s almost like an interview to an interview. You’re like, “Okay, I get what you’re doing and you have the hot company, but life is long.”

I think the best way to approach this is to try and be a human being most of the time, either as an entrepreneur or a VC, and recognize it’s a massive, multi-period game. But at the same time, you can’t deny that the market is the market, and right now that market is wildly pro-entrepreneur. Railing against that, Harry, or being romantic about that, is a waste of time.

8. Venture Capital Reaches Half Trillion

Tomasz Tunguz

Okay, so I have a question. What are the odds, do you think, that the US venture capital market hits half a trillion by 2030 in size?

Rory O’Driscoll

What’s it now?

Tomasz Tunguz

When I started in 2008, it was about $8 billion. In 2021, it hit about $300 billion, and today it’s about $270 billion to $275 billion.

Rory O’Driscoll

100% chance. Maybe more than 100. What’s north of 100 again?

Tomasz Tunguz

Okay. So if that’s the case—

Rory O’Driscoll

I’ll tell you why, but keep going.

Tomasz Tunguz

Okay. So let’s assume that’s the case. Then venture capital, or the cost of venture capital, continues to decrease, which means valuations continue to increase, which means capital increasingly commoditizes.

Rory O’Driscoll

Put it this way: you would be correct, Tom, on the data that you put forth. I’m going to add 1 more data point that you missed. What was your first year, 2008? How much was in the business? What did you say? What was your first number? Twenty—

Tomasz Tunguz

Eight.

Rory O’Driscoll

Eight. What you missed was that in 1999, 4 years beforehand, there was $100 billion in the same system. So it went from $100 billion to $8 billion. Basically, since then, it’s been an upward line.

I remember I was in the business from ’94 on. I remember in 2000, you literally could delete 75% to 80% of your address book because you were never going to see them again.

They’re just VCs who were gone. So if you extrapolate the line, you get to $500 billion. You’re exactly right. If you allow for a cull, maybe you don’t.

Well, but here’s the thing. It depends what you mean. I’m just looking at Excel’s GlobalScape, which they published this week. They had a nice chart. Tomasz always has the better data, but they said this year they’re estimating $184 billion in venture capital invested, by their definition. The peak was 2021 at $183 billion, so one more billion this year.

But half of the $184 billion is into 4 companies. So is that venture capital? If that’s venture capital and AI grows at anything like the rate we’ve discussed, of course it will double. Maybe 110%, 95%. But only 74% went into the rest, which is half of 2021 and consistent with 2020. So it could be that YC is overloaded and these 4 or 5 names are overloaded, but for the rest, the money says it’s not overloaded. It’s not easier.

Tomasz Tunguz

Yeah. It’s money from the public market that is fighting its way to those shares, irrespective of the venue. That’s what you’re saying.

Rory O’Driscoll

So we have this bimodal market where YC and maybe Neo and a few others have huge benefits, and they’ve earned it, right? Then the massive names have earned it. And then we’ve got 900 unicorns that are never going to IPO. Poor guys. We all have 1 or 2 in our portfolio that are at 9 figures in revenue, that are still growing and will never IPO, and there is no PE buyer for them.

I think we really have to define what venture capital is to fully answer your question. But if you include Anthropic, OpenAI, and xAI, it’s got to double, right? SpaceX, it’s got to double. Ramp doesn’t even make the list. Poor guys at $32 billion. Maybe they’ll get there. They’re only consuming a few billion. It’s not enough.

Tomasz Tunguz

And so what we’re basically talking about is a huge concentration of those dollars at the very, very late stage. I mean, these seed rounds of $1 billion—

Rory O’Driscoll

Absolutely. None of it matters. To be clear, Tomasz, that was actually a helpful intervention because it made me realize something. The answer to the question, “Will the industry double in the next 2 years?”—you hinted at it earlier when you said it’s a function of whether the return is there, then it will double, because money chases returns. That’s the first statement, right? If the returns continue to be really good, more money will come in until eventually the money kills the returns. That’s the way the movie works.

So the question of whether the industry will double can be reduced to a simpler question: Will the returns be good? The aha that you guys just gave me is that, to a rounding error, that question really resolves itself to whether the 4 or 5 companies that constitute 40% of that industry, non-diversified, will be good.

If OpenAI, Anthropic, and xAI yield the return that everyone obviously hopes they do, then already you’ve taken half the risk off the table. Everything else does roughly okay. Even if some of the old stuff doesn’t work out—a lot of the old stuff doesn’t work out—the $40 billion in OpenAI, from a pooled-return perspective, can swamp 40 separate unicorns entirely. Poof, gone.

So basically, you could be right. If the concentration works, it’s all going to be fine and the industry will keep on chugging. If the concentration doesn’t work—

Tomasz Tunguz

Yeah. So what you’re saying is, if OpenAI trades up at IPO, it’s roses for everybody.

Rory O’Driscoll

More Anthropic than OpenAI, but those kinds of things. Remember SpaceX too, which is worth $300–400 billion. It definitely helps a lot.

Harry Stebbings

The way I always see that, actually, is in meeting LPs, because of the number of LPs that are sitting there with positions in Stripe and SpaceX and the names that we mentioned. And I think you forget the downstream multiplier recipients of all of these big names—literally dentists in SPVs now, in a lot of them. Poor dentists; we always use them. But it’s just the thousands and thousands and thousands.

Rory O’Driscoll

It’s back to what Tomasz said earlier. This is where we find ourselves. Who knew? But this is it. The bet is on, and the bet is singular and utterly correlated.

Why do dentists have so much time, by the way? It seems like they finish work at 5:00 and just go home and figure out how to invest their cash. I’ve never seen a group outside of tech more obsessed with tech investing than dentists.

It’s because they have a non-insurance-governed market. It’s a cash-pay market. Dentistry is a good business because you get your crown done and you pay cold, hard cash. They don’t have to deal much with insurers. They just make good money.

If you go to your dentist, they’re all good businessmen. They have 10 chairs running. They have 10 hygienists. You get 5 minutes with your dentist. He charges you a ton. It’s a great business.

I try to avoid dinner parties, but my biggest fear is going to one and sitting next to a dentist—not because I don’t want to talk about his or her business. I don’t want to talk about tech.

“Can you get me into Tomasz’ latest deal? Can Harry get me into Perplexity? Can you ask Harry if I can get into Perplexity?” with the dentist. Oh my God.

9. Rory Backs GC AI

Harry Stebbings

Rory, after all these weeks of Harvey and Legora and me chatting about Solve, you go and do a deal in legal tech, baby. GC AI raised from Scale at a $550 million post-money. Well, weren’t that price-sensitive, were we, Rory? What are the top lessons, then, Rory, from leading this round? I’m really interested, given that we’ve talked a lot about it.

Rory O’Driscoll

Sure. And look, I’ll say something: I didn’t expect to lead this deal. We were doing references on another company in broadly the same space, and we just got customer love for this product. It’s just that simple. We just got customers saying, “I really like this.”

Again, I don’t like making this show about our own deals because I think people respect the fact of, “I’m not trying to talk our own book,” so we’ll keep it tight. The name says it all. It’s GC AI. It’s AI for the in-house legal team, which is different from AI for corporate law.

We talked to customers in a related space. They all knew GC AI. They all liked it. The adoption was huge. The barriers to adoption were low. It really dealt with what the GC does in their daily business. So that’s how we got to the company, and it was just great references. We like the team and the traction. I mean, not much more complex than that.

The company’s growing really fast, barely able to spend the money they raised. So you’re in it, it’s profitable, and it’s growing very quickly.

Harry Stebbings

How did you get comfortable with future financing partners, given everyone is out of market, being an investor in Harvey or Legora? Because they won’t touch this.

Rory O’Driscoll

Yeah, so we do see a slightly different market, but the more important point is this: The company is wildly cash-efficient. They haven’t spent their last round. I mean, we have a very elegant distribution strategy, so I don’t think we’re looking at a whole bunch of huge raises.

One of the things we’re thinking about, stepping back and making it less about the deal, as you’re leaning in a little on price in some of these companies, is that I want to at least pay attention to burn. What you don’t want to be is a high-price, big-burn deal.

What I find very attractive is that some of our recent deals—actually, 2 of the most recent pre-seed deals—have all been hovering around cash-flow positive despite trying to invest more, because the organic demand has been such that you’ve been able to sell enough to, frankly, fail to invest ahead of revenue.

If you do have a downturn, I think that’s a nice place to be, right? A little more demand-led, a little more PLG-led, and a little less massively expensive.

Harry Stebbings

And you weren’t concerned about the kingmaking?

Rory O’Driscoll

I do buy the idea of leaders, first of all, that they can become the leader in the industry, and that’s a big advantage, going back to what we said earlier about durability of lead. I even buy the fact that money can be important, especially in the big-burn deals. I do buy some kind of employee-level kingmaking if you’re seen to be a hot venture firm in the Valley.

But step back. In the wider US, I don’t buy this idea that because X company got money from Y VC, the average corporate buyer cares all that much. They want to solve their problem. So I’m not a believer in kingmaking being dispositive when you have great execution and great customer love. I think the customers decide.

We’re in a capitalist economy, and the definition of a capitalist economy is that the customers decide whom they choose to do business with. On average, customers are rational. They’re going to look, and they’re not going to say, “Oh, this software is crap, but Sequoia invested. I’ll buy that.” They’re going to say, “Which software do I like?” That’s how capitalism is meant to work, Harry, in case you’re unclear.

10. Stripe Stays Private

Harry Stebbings

Okay, so Stripe does a tender at an all-time high of 41 bucks. I’d love your thoughts.

Tomasz Tunguz

Yeah. We have a new public market. This is wild for me. I went back and looked at Microsoft. You needed $50 million in trailing revenue and 6 quarters of profitability to go public, right? And the cost to take a company public was a couple million bucks.

To do a late-stage financing, what is the legal cost? Rory, you’d know. What is the legal cost on a Series D? It’s a million bucks?

Rory O’Driscoll

Probably less on a D, but actually, I think once you get into the employee selling, it gets a lot higher because you have a lot more transaction costs.

Tomasz Tunguz

So let’s call it $1 million.

Okay, what is the average cost to take a company public in the US, according to, I think, KPMG? The transaction costs.

Rory O’Driscoll

Well, it's 7%. It's 6% to 7% of the raise, and the raises are now $200 million to $300 million, so, yeah.

Tomasz Tunguz

It's $25 million to $30 million.

Rory O’Driscoll

Yeah.

Tomasz Tunguz

Transaction costs. And so there's just no—I mean, why in the world would you pay that amount of money to raise a round of capital? Why? It's like getting a $1 million mortgage and having to pay $150,000 in legal fees.

Rory O’Driscoll

The only reason you would, Thomas, is the point you made earlier: if the capital you get is cheaper than the capital you get privately. And as you pointed out, in fact, it's not.

Tomasz Tunguz

No, because now there's an illiquidity premium, right? There used to be—I remember when I joined the venture business, I was taught about the illiquidity discount. Private companies should trade at a discount relative to public companies.

Rory O’Driscoll

You were always taught it was 20% to 30% to the public multiples. That's the discount it should be for late stage.

Tomasz Tunguz

Right. And now there is an access premium. Harry mentioned this. So have we completely inverted? Is the access premium now 20% to 30% above public?

Rory O’Driscoll

It probably is. So from a company's perspective, it's a cheaper cost of capital with a lower transaction cost. Why wouldn't I do that?

Tomasz Tunguz

And then the ongoing service of that financing round is significantly less burdensome to the business because of quarterly earnings and all that kind of stuff. So you really only have to go public if you need to raise a quantum of capital that is so massive that the private markets cannot support it in some form or another.

Rory O’Driscoll

Do you think that even is a blocker? Why would you not be able to raise billions privately? OpenAI are proving that you can.

Tomasz Tunguz

I guess you're right. I guess they could raise in the private markets.

Rory O’Driscoll

And we have a liquidity mechanism now where you can trade in and out—not quite as efficiently, but still pretty efficiently.

Tomasz Tunguz

Right. And it's a form of regulatory arbitrage, right? If you think about it that way, it's a whole lot easier.

Harry Stebbings

So the reason that you would actually go public, maybe, is bluntly because you need dumb retail investors to supply you with cash. That's the only reason—

Tomasz Tunguz

It's a capital market of last resort.

Rory O’Driscoll

Well, no. I love the access premium thing. I think there's a small number of companies who, even at super scale, have this desirability and cachet such that they can continue to raise in the private markets, right? I think Stripe's a good example of that. Obviously, the AI models.

I don't think it's true for most companies. Let's take Navan. They just went public. Or Commvault, or ServiceNow went public this year—or maybe late last year, right? Great cloud companies, but they're not going to raise 10 more private rounds because they're not wildly sexy. They're just perfectly good businesses.

So they didn't have access to this—I love the expression—access privilege, access premium private capital. They couldn't get it done. You wouldn't be able to do a $200 million to $300 million employee liquidity for a company like that. It's just not desired enough.

To bring it back to Jason's comment, your dentist doesn't get excited about being in ServiceNow while it's private. So ultimately, they had to go public because that was the lowest cost of capital available to them, and that is going to be true for most companies.

There will be this small number of high-taste, high-premium, Silicon Valley-beloved companies that can push it off a lot longer. The only time Stripe will go public, and we've said this on a call before, is when the capital available in the private markets is too expensive.

Tomasz Tunguz

Okay, but let me make the case for why I disagree with that. I don't know if I believe this, but let me straw-man it for a second: retail has had no access to venture for the last 15 years. It's been in technology, basically, where you want to be.

Now, with upcoming changes in regulation, I can take my 401(k), put it into an ETF, the ETF goes into a fund of funds, and the fund of funds invests into venture capital. As a result of that flood of retail capital, those dollars need to go someplace.

They'll probably end up going into the businesses that, you're right, are not the top, Pareto-optimal 80% of secondary dollars where the market is effectively liquid. But those retail dollars are effectively going there, and they're still probably cheaper than the public-market dollars.

Rory O’Driscoll

That's a fair counter, and it's true. Provided the capital keeps coming in because it perceives the returns to be high, more and more people will be able to stay private.

Again, the reason that capitalism has bankruptcy and downturns and pain and suffering and wipeouts is to stop the extrapolation to infinity. And until that happens, it's not going to stop. You're exactly right. If returns go monotonically up for another 5 years in venture, more and more money will come in. And all it will ensure is that when they do, in fact, go down, they'll just go down further.

Harry Stebbings

Do you think the supply of cash is dependent on the returns? I was with Hemant from GC. I was with one of the great investors from Coatue, and they were saying the opening of retail is the next frontier of the supply of our business.

Do you think the opening of retail is predicated on great returns, or are we just going to see it open over the next few years regardless?

Rory O’Driscoll

I think in the end, when people lose money, they figure it out. They may take longer. They may be last to the party. In the end, the only thing that matters is returns. The only question is, how long does “in the end” take?

We're in an industry which has very long reaction cycles. You put in the money. You don't get a signal for 5 years. You don't figure it out for 7. The runway at which things can continue is very long.

Harry Stebbings

But we could see the opening of retail much quicker than the runway happening. We've got Coatue with $3 billion now in retail funds, and we're seeing GC be very aggressive in opening up retail funds.

That could come in the next 24 to 36 months, whereas that evolution of poor returns could be a 5- to 7-year lag.

Tom Loverro

You mean there's a mismatch between assets and liabilities? How many times have we learned this lesson? I think you're totally right. You look at Blackstone's real estate investment trust: they ran a huge retail fund, I think $21 billion, and then had all kinds of redemption issues associated with that.

I agree with you, Harry. I think there's a tsunami of retail capital that's coming into venture, which is another reason to believe why the asset class, broadly defined, will hit half a trillion before the end of the decade. Because they're illiquid assets, they're not marked to market very often. The hottest ones, sure, it sounds like they're marked to market every 4 months, but the 2021 marks on the unicorns won't be marked to market for 12 to 18 months, maybe longer.

Harry Stebbings

Tom, should we do a $10 billion retail growth fund?

Tom Loverro

Let's do it.

Harry Stebbings

Fucking A.

Jason Lemkin

Only fees. Only fees required on this fund. You guys keep the carry. We want you to make money. We'll just take 5% a year in fees.

Tom Loverro

Yeah, we just want finder's fees.

Jason Lemkin

That's enough. We want you to capture all the upside.

Rory O'Driscoll

I will say one hard-nosed thing. This is all great until you've had to go into a room and look people in the eye and say you've lost them money, right?

I did my own business when I was 21, and it didn't work out. At 26, I had to shut it down, and I had to go into a room and say to people, “All your money's gone.”

We're talking all this great game, but there'll be a miserable part of this when you've taken these big funds, it was fun, and you put all the money out, and then you realize you've locked in a whole bunch of retail investors to a subpar return for a decade. That will not be fun. Just remember that. Hold that thought for 5 years from now.

Harry Stebbings

I'm not going to let you read the kids a bedtime story. Thanks for ruining that party, Grandpa. Fucking hell. We were talking about 5% fees on $10 billion, and you come in with, “You've got to come in and throw water on the fire.” All right.

Rory O'Driscoll

You're going to have to have an annual meeting for 10 years and explain to them why you've made a ton of money and they've lost.

Harry Stebbings

Ah, that's why Jason doesn't have an AGM. You don't do that meeting. Right, team, before we do a quickfire, are there any final topics that we need to discuss that I've missed?

11. Secondaries Replace IPOs

Jason Lemkin

You know, just one, since we have Tom here. I just wrote it up today on SaaStr. We're not ending the year with a great IPO market. We're not.

When we started this show—30-something shows ago—IPOs were just coming back, and it looked like 2025 would be a pretty good year. Now, in some senses, it's a good year, right? But we're well off our peaks, and the number of deals is not what we thought.

StubHub is a mess. We have some deals that are a mess. Navan's a mess, even though it's a great company. We're ending the year with an IPO whimper. It's kind of a bummer, despite Cursor hitting $30 billion in 22 months. It's kind of a bummer.

Tom Loverro

Yeah. I think the lens may be outdated. What I mean by that is, I think secondaries have exploded—absolutely exploded.

If you look at private equity, the total fraction of dollars in secondaries as a fraction of the asset class is about 25%.

Tomasz Tunguz

Historically, venture's been about 2 to 3. Now we're 10 to 12. Liquidity dollars, maybe another way of defining it, is the total value of liquidity dollars irrespective of liquidation channel: M&A, IPO, secondary. That's the stat that I'd want to see, and I bet that we're up meaningfully on it.

Just through the conversation that we've had, nobody wants to go out. Why would you go public? So, yes, IPOs will remain a very slow way and probably a decreasing share of total count and dollars. Except when OpenAI goes public, they will likely remain the less attractive liquidation option.

Jason Lemkin

You really believe that, or are we just deferring these IPOs? You believe they'll never come for the top 50 names? They'll literally never go public?

Rory O'Driscoll

I mean, why?

Tomasz Tunguz

What are you getting?

Jason Lemkin

If you fall a little bit out of the top 30, just a degree out of the top 30, right?

Tomasz Tunguz

Right. Okay, so Goldman bought Industry Ventures, a leading secondary fund. It paid the highest multiple, I think, ever for an asset manager. Why? Because a lot of retail dollars are coming, and they need to go into the private asset class.

What's the best way of doing it? Secondaries. So I think there will be a mid-market secondaries market for not names 1 through 20, but names 2 through 200. And you made the point, Jason, before: 900 unicorns, they're never going public. No. But people will need liquidity in some form or another.

Jason Lemkin

But there's no liquidity for them, my friend.

Tom Loverro

But there's some market-clearing price for that secondary.

Rory O'Driscoll

I agree. I think you're right on that part, Tom. I disagree on the IPOs, but I think you're right. The 900 unicorns have to go to someone that is worth north of zero and south of $2 trillion. Somewhere between those 2 numbers, there's a buck to be made. And you're right, someone's going to have to deal with the problem of cleaning up 900 companies, and maybe turning them into 30 great companies, merged up or acquired or whatnot.

It's some kind of restructuring business. I'm not sure I agree, though. I think in the end, the big exits will IPO, and we're in the business of the big exits. I don't believe long-term—I mean, the top 30 names prove me a liar today—but I think over the medium term, the IPO window has to be open for the math to work overall, and it just has to become more relatively attractive.

You are right: the direct cost to the company of an IPO is higher than the direct cost to the company of a private round. But if you look at it from a systems perspective, private capital has 2 and 20 fee drag, and public markets have almost 60 bps of fee drag. From a societal perspective, there's no doubt in my mind that assets being managed privately have a far higher aggregate cost between the cost to the issuer and the cost to the investor than public assets.

Tomasz Tunguz

Yeah. But I think that changes. I think the fee structure changes on these extremely late—

Rory O'Driscoll

That's interesting.

Tom Loverro

Retail products.

Rory O'Driscoll

Then you could be right.

Tom Loverro

Look at SPV fees. They're not 2 and 20.

Rory O'Driscoll

That's fair.

Tom Loverro

The fees are significantly less. They're significantly less.

Rory O'Driscoll

So, those late-stage guys, the good news is your business is going to double, and the bad news is you're working for 1 and 15.

Tomasz Tunguz

Right. So I was looking at PE funds. You can look at PE funds, the publicly traded ones, and you can see the average fee load is something like 65 to 75 bps. At some point, you'll see late-stage funds and venture capital have to approach that because they need to be competitive. Then I think the math can work. But I don't know. Look, we're all just pontificating.

Jason Lemkin

Tom, let's delete that. We don't want to talk about reduction in fees. We've just said about a $10 billion fund. You want to do 65 bps? Dude, come on. You think Jason's getting out of bed for 65 bps?

Tomasz Tunguz

No. We're craftspeople here.

Jason Lemkin

Come on.

Tom Loverro

We're craftspeople. We're making artesian water.

Rory O'Driscoll

Exactly. We're making artesian water. They're writing $200 million checks, so even 65 bps is plenty of money to monitor 1 deal. They'll be fine.

Jason Lemkin

Dude, Jason needs to buy a place in Yellowstone. 65 bps ain't it. Come on. We've heard about it. Country club.

Tom Loverro

I've got enough.

Jason Lemkin

Enough material goods. Starting to shed them. But, Tom, you think there'll be a perpetual secondary market, like an infinite secondary market for top names? Because that would be very disruptive. We can't prove that yet, right? But that would be utterly disruptive to venture as we know it if secondaries go forever. It feels like it's true of SpaceX at least, right? No one's expecting an IPO there ever, are they?

Rory O'Driscoll

No. PE works: you buy and hold for 3 to 5 years, you package it up for the next person in the value chain, right?

Tom Loverro

Yes.

Rory O'Driscoll

That's how it works. For a $10 million EBITDA company, I get it to 25 as a result of acquisition and operations. I hold it for 3 to 5 years, and I sell it to the next guy. I think venture moves in this direction, except for a handful of very, very large funds.

If that's true, then venture's failed. If you look at the top 10 companies by market cap in the US, 9 of them are venture-backed. Those companies don't get PE packaged around them. PE makes a lot of money moving mid-market shit up and down the value chain, and nothing is amazing, but everything is good. We're in the business of lots of things being utterly crap, some things being okay, but a few things being amazing, and the amazing set moves everything else.

Tomasz Tunguz

Okay. So, Rory, you find your nth fund returner. You find your nth decacorn. I don't know how many you have, but I'm sure you have many. You know that it will take 15 years to get to liquidity.

What you do is decide, "You know what? I'll sell a quarter of the position 3 rounds later, and then I'll sell a little bit more in the next round, and then I'll sell a little bit more in the next round, and I'll dollar-cost my way out of this business." It may not look exactly like PE because it's not a full-ownership sale.

Rory O'Driscoll

That's fair. Yes, I do buy that. It's not a PE sale. Basically, what you're saying is, in this pretend public market that's still private, I act exactly as I would have in the public markets; I just do it at a different transaction cost to a different set of buyers. Yes, I buy that.

Tomasz Tunguz

That's right. I think that's what's happening. Unless the cost to go public and the premium that the public market is willing to pay change, the trend is inexorable, and the number of publicly traded companies will dwindle as PE picks them off.

I think in 2022, I calculated PE had taken private 12% of all publicly traded software companies in a year.

Jason Lemkin

That was 2022. Yes. They hoovered it up.

Tomasz Tunguz

If that continues to be the case, and we only have 8 IPOs, the number of publicly traded software companies—they're a dying breed.

Jason Lemkin

So IPOs will be for the A-minus. They'll be for names 50 through 150. Very, very good companies, 500 million, growing 50%, but that can't do quarterly tender offers of billions a year. It'll be for the B tier.

Tomasz Tunguz

Well, it kind of depends on how big the retail flow is into the secondary market. It may be for companies like 200 to 500.

Jason Lemkin

That'd be a gift.

Tomasz Tunguz

Oh, yeah.

Jason Lemkin

That would be a thumbs-up.

Tomasz Tunguz

But there are a lot of pieces coming into place where the probability is increasing.

Rory O'Driscoll

I do agree with that. I think every part of the trend is in your favor to prove you right in this assertion. The unknown is how people's response will be to a significant down market, which we haven't seen meaningfully since 2008–2009, and in tech, really not since 2000 to 2002.

The 2 things were a meaningful down market where you're not able to trade the stocks because there's no private liquidity. We'll see how that impacts the trend, but until then, I think you're right. I think the trend is clearly going this way.

Harry Stebbings

Okay, team, we're going to do a quick fire.

Rory O'Driscoll

He loves his Kalshi, Tom. It's a pain in the butt, but you've got to deal with it.

Tomasz Tunguz

No, I love Kalshi. It's awesome. It's another new stock market.

Harry Stebbings

Yeah, yeah, yeah, yeah, yeah. Thank you. Optimism. Optimism, Rory. See that? We love Kalshi. Thank you. Would you rather invest in Cognition at $12 billion or Cursor at $29 billion?

Tomasz Tunguz

Cursor.

Harry Stebbings

Jason?

Jason Lemkin

Yeah. To me, I usually go with the cheap one, but the numbers are just jaw-dropping with Cursor. You've got to go with it.

Harry Stebbings

All right. Harvey at $8 billion or Legora at $2 billion?

Tomasz Tunguz

I'll go Legora, knowing very little about the business. It's just the entry price.

Jason Lemkin

I'm seconding it. Listen, I'm only so smart. I don't see the $30 billion exit in the category yet, but it may be ignorance. I believe in the AI GC. I believe in that model. I met her at the seed round. I think it's a great investment that Rory made, but I don't see the $30 billion exit to justify Harvey yet. It may be my ignorance.

Jason Lemkin

If I had the numbers in front of me, I might say, “I’ll do it at 12,” but I have to go with Legora just for the math. I’m backing Tom on this one.

Rory O'Driscoll

Oh, my God. We’re in sync again. Entry price counts on this one. Funny, because—

Rory O'Driscoll

Sometimes.

Tomasz Tunguz

I think it’s an interesting point. Yeah, you’re right, because we didn’t do entry price counts on Cursor. Entry price counts when TAM is unclear. Winning is the only thing that counts when TAM is huge.

Rory O'Driscoll

Well said.

Tomasz Tunguz

I think our 2 choices have been rational.

Harry Stebbings

Love that. Give me a quarter for when OpenAI will go public.

Tomasz Tunguz

That’s not on the list.

Harry Stebbings

Well, think on your feet.

Tomasz Tunguz

Q3 ’26.

Rory O'Driscoll

Yeah, Q3 or Q4 ’26. It’s slated for next year; the year hasn’t started yet. It’s already the end of the year. You’d want to be going into, leaning into ’27. That was a very good call. Sorry. We’re well in sync again.

Jason Lemkin

I think that’s a good idea. I think Sam will come up with so much alternative financing, it’ll slip into mid-’27. But I think that’s the straw man today, would be my guess. That’s the plan, but there’ll be so many other sources. Maybe the government will guarantee it. Who knows who will guarantee the money, but I think it’s going to—again, that’s going to be the straw man, but it’ll get pushed to ’27.

Rory O'Driscoll

To be fair, we do now know from Intel that the price of a guarantee is 10% of the fully diluted common stock. So for $50 billion, I’ll gladly guarantee OpenAI myself. That’s a priced call here, but—

Tomasz Tunguz

If you could guarantee infinite compute, it might be a good deal.

Rory O'Driscoll

It might be a good deal. Okay.

Tomasz Tunguz

It’s not like Sam’s seen a lot of dilution. If I were running OpenAI, I would not be dilution-sensitive if I had no shares. I would be growth-sensitive. I would raise as much money as possible if either I had full anti-dilution or no shares. I would raise everything.

Jason Lemkin

Funny thing you should say that, because we’ve talked a bit about this in the past, and I meant to say it at the time, but there’s always something terrifying about someone who’s in charge of a company who’s just not money-motivated or incentivized. Anyway, it is kind of bizarre. I always have this reassuring feeling when I realize my CEOs are motivated by dilution and money, because then you know where the buttons are.

It must be weird to be on a board with someone where you’re like, “What are your buttons?” Because you’re right, they’re not dilution. It’s that they’re for world domination, and that’s just kind of weird.

Tomasz Tunguz

I had one CEO I worked with at the beginning of my career. He had negotiated full anti-dilution as CEO through the IPO. He was re-upped in every single grant, every single everything. He was guaranteed his 7% through the IPO.

Jason Lemkin

Oh, wow.

Tomasz Tunguz

He was a good guy, but it did actually change a lot of motivations. He was an outside CEO who came into a clusterfuck, okay? That was his condition. He was like, “I don’t know how much capital this is going to take to fix. This is not Cursor. It’s a real business, but I’m not going to take that risk if you want me, because I can’t predict what it’s going to take to right the ship.”

He did right the ship. He did take the company public. It’ll be nameless, but it did create a different set of incentives.

Harry Stebbings

Listen, team, I’m excited for us to be partners in the growth fund. It’s going to be a very profitable journey that we have together. This is a transition from our normal early stage. Tom, you’re going to have to let the Theory LPs know about that slight strategy shift.

Tomasz Tunguz

I know we said we were artisanal, but we decided that volume was the way to go.

Harry Stebbings

Yeah, it’s just so hard, you know? Jason told me seed was for suckers, and I was like, “Okay.” We’re making T-shirts, by the way. We’ve got T-shirts being made with Jason’s face and “Seed is for suckers.”

Jason Lemkin

Yeah.

Harry Stebbings

It’s brilliant. Yeah, yeah, yeah.

Jason Lemkin

It’s great. You don’t have to go to board meetings. You don’t have to add any value. You just write the check and send some tweets.

Rory O'Driscoll

And get the step-up.